Productivity rises, business value sinks: what's going on?

Business labor productivity increased at a 2.6 percent annual rate during the fourth quarter of 2010, the US Bureau of Labor Statistics recently reported. The gain in productivity reflects a 4.0 percent increase in output and a 1.4 percent increase in hours worked. From the fourth quarter of 2009 to the fourth quarter of 2010, productivity increased 1.9 percent as output rose faster than hours. Annual average productivity increased 3.9 percent from 2009 to 2010.

This should be good news for organizations struggling to advance in turbulent economic times. And rising productivity is  certainly good news for the economy.

However, Deloitte’s Shift Index paints a picture of distress -- the return on assets of US businesses is only a quarter of what it was in 1965. Turbulence, as manifested by ever-briefer life expectancy of Fortune 500 firms and executive turnover, is only growing.

The Deloitte report takes note of this paradox between productivity and performance, observing this is evidence of a shift toward an environment that is far more unforgiving toward businesses that don't adapt swiftly enough to changes around them. Deloitte observes that the return on assets performance gap between winners and losers has increased over time, "with the 'winners' barely maintaining previous performance levels, while the losers experience rapid deterioration in performance." In addition, The “topple rate” at which big companies lose their leadership positions has more than doubled, "also suggesting that 'winners' have increasingly precarious positions."

Technology may be accelerating productivity, but may also be shortening the windows of opportunity for companies:

"The exponentially advancing price/performance capability of computing, storage, and bandwidth is driving an adoption rate for our new 'digital infrastructure' that is two to five times faster than previous infrastructures, such as electricity and telephone networks."

The ability and flexibility to quickly move with markets not only comes from technology adoption, but building a culture of innovation that taps into the creativity and energy of both employees and customers:

"While the performance of U.S. firms is deteriorating, the benefits of productivity improvements appear to be captured in p art by creative talent, which is experiencing greater growth in total compensation. Increasing customer disloyalty indicates that customers also appear to be gaining and using power."

Deloitte recommends that companies seeking long-term growth and value creation not only tap the power of information technology, but also through approaches such as open innovation and and process network initiatives, such as social networking:

"To make the most out of this new environment, companies should provide their employees with appropriate guidance and governance on how to participate in knowledge flows. They can also use pull approaches as a new way to interact with consumers. Collaboration marketing, for example, acknowledges newly powerful consumers by focusing on a company’s ability to attract (create incentives for people to seek you out), assist (be as helpful and engaging as possible), and affiliate (mobilize and leverage third parties)."

This post was originally published on Smartplanet.com